Bond Gurus Provide Insight into Investment Strategy at UCLA Anderson

LOS ANGELES - On February 1, 2006, a standing room only crowd packed Korn Hall for an evening with two of the nation’s most prominent fixed income investors, PIMCO Founder, Chief Investment Officer and Managing Director Bill Gross (’71) and BlackRock Chairman and Chief Executive Officer Larry Fink (’76). Part celebration and part summit meeting, the inaugural event was presented by UCLA Anderson’s Center for Finance and Investments.

Among the guests were members of UCLA’s Board of Visitors, dozens of faculty members and hundreds of students and alumni. The program began with the Finance Center’s Director, Professor Richard Roll, outlining the Center’s goals. They include preparing students for complex work in finance, undertaking and sharing research, taking the lead in recruiting finance faculty and sponsoring forums and presentations like the one held that evening.

Introduced by UCLA Anderson Dean Judy D. Olian, Gross and Fink took seats and prepared to take questions from one of the nation’s most prominent business journalists, Alan Sloan of Newsweek. Sloan opened by stating that there was “more than a trillion dollars in assets sitting on that couch,” a figure that summed up the significance of having the two UCLA Anderson alumni together on the stage.

What followed was an open discussion that ranged from their takes on retiring Federal Reserve Board Chairman Alan Greenspan to global economics to the danger of mounting United States debt.

Highlights

On Alan Greenspan ...

Larry Fink: “Quite frankly, Alan was not a great economist. However, as a Federal Reserve chairman, the man was brilliant. He basically allowed the market to handle situations. He understood markets and understood that the dynamics of the market would sort itself out. He has been the ultimate as a free market Federal Reserve Chairman. We all benefited from his 18 years. Do I think we’ll miss him? No, because I think Ben Bernanke and the Federal Reserve understand that the role of the Fed is to allow the market mechanisms to work and to intervene when they need to. I think the institution will be fine without Chairman Greenspan but I think his legacy will last a long time.”

Bill Gross: “I think he was a great fireman. He came to the rescue and provided masses doses of liquidity at the appropriate time and there’s no doubt that there were many of those times … I suspect that what he turns over to Ben Bernanke is the result of that liquidity. You can’t continue to pour money into a system and not have that system take it and generate massive amount of debt and in some cases speculative bubbles. There’s no doubt that, as the world’s primary central banker he has presided over a massive build-up in liquidity that one day will have consequences.”

On the danger of foreign investment ...

Bill Gross: “It doesn’t necessarily end with a bang. It may end with a long whimper. Simply because in my view the U.S. economy is being hollowed out. The game has moved to Asia and parts elsewhere. And to the extent that we’ve lost our manufacturing edge, we’ve suggested that we have a knowledge technological edge. But that in turn is at risk in the face of the Chinese and others producing more scientists and the like that we ourselves do. The claim that the United States superiority will continue to prevail I think is certainly at risk. And so it ends, perhaps with a bang in terms of the liquidity implosion if the Asians, the Chinese and others decide to sell those bonds. It’s certainly not in their interest, (but) it could happen. Otherwise it ends gradually over time as the tremendous liabilities that we generated, not just in terms of paper, but in terms of pensions and health care have to be paid and that’s something that we haven’t faced up to yet.

Larry Fink: “I’m worried about the dependency that we have on foreign investing in the U.S. market … it feels really good now. We as bond investors are winning a lot of mandates from overseas clients. It’s a circle. They are selling us goods. They get dollars. They invest those dollars back in to the United States in the form of bonds at lower interest rates. Lower interest rates help the housing market. The housing market helps the consumer. It’s worked. When I go overseas and talk to our foreign clients, they would like the circle to last forever. And they are all very happy with this model. And that’s what frightens me. Everybody likes this model. The whole world is dependent on this model. I don’t see what’s going to change this model. But I think back in 1999 or 2000, we knew the Internet bubble was a bubble but we had no idea what was going to break it. We have the same problem today. We are terribly dependent on our economy to fund our deficits. It works really well for the Chinese and us, our Middle East clients, but it just feels too good. And so as a cynic, it’s not going to work forever.”

About UCLA Anderson School of Management
UCLA Anderson School of Management is ranked among the top-tier business schools in the world. Award-winning faculty renowned for their research and teaching, highly selective admissions, successful alumni and world-class facilities combine to provide an extraordinary learning environment.

The mission of UCLA Anderson School of Management is to be a global leader in management education, research and service. Established in 1935, UCLA Anderson provides management education to more than 1,400 students enrolled in MBA and doctoral programs, and some 2,000 executives and managers enrolled annually in executive education programs. UCLA Anderson alumni number more than 34,000 graduates around the world dedicated to continued networking, professional development and educational activities.